“Carbon Due Diligence: What Is It And Why Do It?”

Due diligence has long been de rigueur for high-stakes mergers, acquisitions, and similar transactions. Traditionally, due diligence involved assessing various legal, financial, and other risks, valuing assets and liabilities, and otherwise evaluating a potential transaction. The need for specialized environmental due diligence became apparent in the 1970s, following a rash of asbestos litigation and the adoption of federal and state legislation and regulations to protect the environment. The passage of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), popularly referred to as the “Superfund” legislation, which imposed virtual strict liability on landowners for contamination on their property, whether or not they caused the contamination (or, in fact, even owned the property at the time the contamination was introduced) added an entirely new dimension to environmental due diligence and dramatically increased its importance. Now, not only did buyers and sellers need to assess potential liability from the presence of asbestos in buildings, they also had to ascertain whether any pollutants were on, under, or emanating from any portion of real property that would be part of a transaction.  

The latest twist in transactional due diligence—carbon due diligence—stems from the heightened worldwide concern over climate change and global warming caused by the emission of carbon dioxide and other greenhouse gases from mobile sources, power plants and other industrial facilities, and even hotels and private residences. Starting with the Kyoto Protocol of the United Nations Framework Convention on Climate Change (Kyoto, or the Treaty), drafted in 1997 but effective only as of 2005, legislation has emerged from the European Union (EU) and, increasingly, here in the United States, to regulate the emission of greenhouse gases. With the establishment of the Regional Greenhouse Gas Initiative (RGGI) by ten Northeastern states, passage of the landmark Global Warming Solutions Act of 2006 (AB 32) in California and the release of the movie “An Inconvenient Truth,” interest in the potential environmental and economic impact of global warming has reached the kitchen, the boardroom and, finally, Congress.   

For good or ill, conventional wisdom increasingly holds that we are headed toward a “carbon constrained” regime. To meet the challenges of such a regime, companies must begin to understand how carbon emissions from their manufacturing or production processes and their other facilities will affect their long-term economic viability.

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